Module 2 – What Is the Entrepreneur’s Role in Creating Value?

 

"If you create value for other people then you might be able to realize a portion of that value yourself…If someone does something that is valuable, that is enough to build a good business based off of.”

– Mark Zuckerberg, Time Magazine

 

“…between one-third and one-half of the differences in economic growth rates across countries can be explained by differing rates of entrepreneurial activity. Similar strong results have been found at the state and local levels.”  

– Russell S. Sobel, Entrepreneurship

 

Overview:

Wealth does not simply exist naturally in the world. The things we want and need must be created or produced before they can be enjoyed. Entrepreneurs play a key role in value creation. They create value for themselves by creating value for others. This series of lessons explains the entrepreneur’s role in creating value for themselves and for society. Societies that encourage entrepreneurship through economic freedom tend to see much faster economic growth than those that do not.

 

Concepts and Terms:

• Business
• Capital
• Customers
• Entrepreneurship
• Factors of Production
  • Capital
  • Land
  • Labor
  • Jobs

 

• Profit
• Shareholder
• Stakeholder
• Value
  • Intrinsic Value
  • Objective Value
  • Subjective Value
  • Labor Theory of Value
  • Wealth

 

 

 

 

Objectives:

Students will be able to…

• Define value and describe why goods of value must be produced
• Explain the difference between subjective value and competing theories of value such as the labor theory of value
• Identify the difference between creating value and creating work
• Discuss how an entrepreneur creates value for society
• Explain the essential role entrepreneurs play in creating economic growth
• Articulate what it means to create value for oneself by creating value for others
• Understand the entrepreneur’s role in discovering and innovating new and better ways of solving problems to meet human needs

 

Related Standards:

Standard 2: Decision Making – Effective decision making requires comparing the additional costs of alternatives with the additional benefits. Many choices involve doing a little more or a little less of something: few choices are “all or nothing” decisions.

Standard 3: Allocation – Different methods can be used to allocate goods and services. People acting individually or collectively must choose which methods to use to allocate different kinds of goods and services.

Standard 13: Income – Income for most people is determined by the market value of the productive resources they sell. What workers earn primarily depends on the market value of what they produce.

Standard 15: Economic Growth – Investment in factories, machinery, new technology, and in the health, education, and training of people stimulates economic growth and can raise future standards of living.

Lesson 1 – Value is in the Eye of the Beholder

 

Description:

In this lesson, students will learn that value is subjective; that is the value of something is based on individual preference. People can value the same things differently, and a person can value the same thing differently at different times. While resources such as the amount of labor or the material something is made of factor into people’s valuation, they alone do not determine their value.

Students will first watch a video in which Donald Boudreaux uses t-shirts to demonstrate how value is subjective. They will then participate in an activity explaining why an object’s value is not solely determined by the labor that went into making it or the material it is made of. Lastly, the students will read and discuss an article by Max Borders in which he explains the concept of subjective value.

 

Time Required:

 45 min

 

Required Materials:

Internet connection, writing instrument 

 

Prerequisites:

Module 1 – What is Entrepreneurship?

 

 

 

2.1.A - Watch and discuss the following video using the questions below to guide your discussion [15 min]:

Video:(Learn Liberty, 3:50 min)

“Prof. Don Boudreaux demonstrates the subjectivity of value by comparing a Che Guevara and Milton Friedman t-shirt. He finds that value cannot be determined objectively, as the value of the thing is held only in the mind of the beholder. Therefore, value is not a product of the amount of labor or resources required to make it. Rather, value is determined by the preferences of individuals.”

Discussion Questions:  Subjective Value

1.  Explain the concept of subjective value.

1. Prof. Boudreaux explains subjective value using the example of the two shirts. Both shirts cost the same amount of time, money and resources to make, but have different value to different people. Prof Don Boudreaux values the Milton Friedman t-shirt more than the Che Guevara t-shirt. However, other people might value the Che Guevara t-shirt more – therefore the value of each t-shirt is subjective.
2. Prof. Don Boudreaux explains “It’s important to understand that the value is not in the thing itself. It doesn’t come like the Marxists believed or even the classical economists believed from the amount of labor that goes into producing it. Value is not a product of how many other resources went into producing something. Ultimately things have value only if and only because human beings want those things. The more intensely human beings want those things, the more valuable they are.”
3. Subjective value is the concept that everyone has different tastes and preferences – so people value goods and services differently to others. Value cannot be measured using the amount of resources that went into producing something. 

 

2.  If value is subjective, how is value measured or shown for the good or service?

1. Value is displayed through the market prices for goods and services. The more people that value a good or service, the more that are willing to pay for it, so the higher the price will be. If few people value a good or service the price will be lower because people will be less willing to pay for it.
2. Prof Don Boudreaux explains “The economists didn’t understand subjective value until the middle of the 19^th century when particularly Carl Menger of the Austrian school realized that people pay for things only because they want those things. They don’t pay for things that they don’t want. And so the value that people have in their minds for the things they buy gets transmitted through money prices into the market prices of the goods and services.”

 

3.  What does the Professor mean by the statement “Value ultimately comes from the human mind?”

1. Value is subjective and is based on people’s preferences, tastes and opinions. As explained using the concept of the two t-shirts, if people’s view of Milton Friedman changed, then the value of the t-shirt would change.
2. All the other resources and every other characteristic about the two t-shirts, apart from the image on the front, is identical.

 

 

2.1.B - Complete the following group discussion activity using the questions below to help guide your discussion [15 min]:

Activity: Myth Busting – Who or What Determines Value?

1.  Is the value of a good determined by the amount of labor required to make the good? (Y/N)

1. No. Although the production of value does require labor, there is more to the story. Consider the following: Is a mud pie that took 2 hours to produce as valuable to you as a delicious chocolate pie that took 2 hours to produce?
2. The amount of labor required to produce each pie is the same, but the value of the two pies is very different.     
3. It is a myth that the value of the good is only determined by the amount of labor required to make the good.

 

 

2.  Is the value of a good determined by the materials that make up the good? (Y/N)

1. No. Although the properties of the materials are important in determining why people may value a good, there is more to the story.
2. Using our previous example, the delicious chocolate pie may be more valuable to you than the mud pie because of the ingredients or materials that make up the pie. However, consider the following: Do you always value goods with the exact same materials equally? Is a beautiful marble sculpture worth the same to you as a marble block?  
3. Value is not solely determined by the materials that went into producing it. 

 

3.  Is the value of a good determined by what it costs to produce the good? (Y/N)

1. No. Take movie popcorn for example. It costs about 90 cents for the raw goods necessary to produce a large bucket of popcorn. However, large buckets of popcorn are sold for a whopping $8.15 on average. That’s quite a markup!
2. Why might people value a bucket of popcorn at the movies at such a high price when it only costs 90 cents to produce? People seem to value the experience of enjoying popcorn at the movies. Many are willing to pay significantly more for popcorn at the movies than they are for popcorn they eat at home.
3. Value is not solely determined by the cost that went into producing it. 

 

 

4.  Is the value of a good constant over time and across situations? (Y/N)

1. No. Different people can value the exact same object very differently.  Your own valuation of the same object can change over time based on your situation. For example, would you pay $100 for a bottle of water right now?
2. What would you pay for a bottle of water if you were dying of thirst in a desert?
3. Value of a good is not constant over time and across situations.

 

 

 

 

5.  Is the value of a good always the result of individual subjective value judgments?  (Y/N)

1. Yes. The value of a good is based on our own individual preferences and how we think the good might help us satisfy our wants and needs.
2. The value of a good is how much the desired good is worth relative to other available options.
3. Economic values are expressed as "how much" of thing would be given up in exchange for some other thing. We will discuss this idea in more detail in Module 3.
4. The value of a good is always the result of individual subjective value judgments. This is another way of saying that value is the result of individual preferences relative to other available alternatives. 

 

 

 

6.  How might understanding subjective value help you as an entrepreneur?

1. People value a good based on how much they desire or need it.
2. This valuation varies from person to person, across situations, and may change with time.
3. The value of goods and services is not based on the cost of materials or labor needed to produce it. Something is only worth what someone else is willing to give up for it.
4. To be successful, an entrepreneur must create value for others. This means entrepreneurs must find ways to learn what their customers consider valuable.

 

 

 

2.1.C – Article: Read and discuss the following article using the questions below to guide your discussion [15 min]:

Article: Subjective Value  by Max Borders (FEE.org) –“Subjective value can be a tough idea for some people to grasp. It can be even harder for people to accept. But here’s the hard truth: Value does not inhere in things. Sunsets are not inherently beautiful. Vanilla ice cream is not inherently tasty. Jazz is not universally loved. Prices are objective—that is, publicly observable. We can each walk into a store and see that the avocado is $1.50. But our inner states will determine whether the fatty fruit winds up in any of our baskets.”

Discussion Questions: Subjective Value

1.  How does Max’s trade of $1.00 for 25¢ make sense? Was it a fair trade?

1. Even though Max received less money, he was willing to give up $1.00 for 25¢ because he valued the quarter (and therefore having dry clothes) more than he did the $1 he gave the man. Likewise, the man valued having a dollar bill more than he did having one less quarter, so he was willing to make the trade. Both Max and the man valued what the other had more than what they themselves had, so they were willing to make a trade.
2. Because both Max and the man thought they were better off and agreed to the trade, the trade was fair.

 

2.  If value is something that is determined in the “private states of people’s minds,” how can we measure value? How do prices arise?

1. We will never know exactly how someone else values something, since we cannot share their mind. What we can do is see how people act, assuming that people act based on what they value. We can see what people prefer relative to other goods.
2. Prices are a result of a complex network of decisions that people make when deciding how much of something (in this case, money) they are willing to give up for something else. Sellers and buyers engage in a discovery process in which they react to each other’s willingness to trade.

 

3.  If value is subjective, why might we be suspicious of one-size-fits all government policies?

1. It’s very unlikely that a one-size-fits all policy will work well, because there is such a great deal of variation between people and how they value different things. Furthermore, these decisions about value are constantly changing. Politicians and bureaucrats will never be able to know how, or why, any one individual—much less the huge numbers of people their policies affect—value things. As a result, attempts to make decisions for others—especially by politicians and bureaucrats, who cannot possibly know how all the people affected by a policy value something—will at best leave many people unhappy, and at worst can prove dangerous.
2. Each of us is the best judge of what we value, since we are the only ones who possess our minds. Free, voluntary market exchange consists of individuals acting on their decisions about what is good for them, judged by themselves—all based on their own subjective valuation. It is the economic system best suited to the reality that value is subjective and is constantly changing, and is therefore the most effective at creating and delivering value for everyone.

Teacher Tip: As an optional activity, choose one student to read the poem out loud to the class.

  

2.1.D – Complete the following optional activity [5 min]:

Activity: Smart

Read the popular poem by Shel Silverstein called “Smart”. People don’t always make smart trades based on their subjective valuations and individual preferences!

 

Smart by Shel Silverstein

My dad gave me one dollar bill

'Cause I'm his smartest son,

And I swapped it for two shiny quarters

'Cause two is more than one!

And then I took the quarters

And traded them to Lou

For three dimes -- I guess he don't know

That three is more than two!

Just then, along came old blind Bates

And just 'cause he can't see

He gave me four nickels for my three dimes,

And four is more than three!

And I took the nickels to Hiram Coombs

Down at the seed-feed store,

And the fool gave me five pennies for them,

And five is more than four!

And then I went and showed my dad,

And he got red in the cheeks

And closed his eyes and shook his head--

Too proud of me to speak!